In 1980, Judge Jed S. Rakoff famously wrote in a law review article that for federal white-collar crime prosecutors, the mail fraud statute was their “Stradivarius, our Colt .45, our Louisville Slugger, our Cuisinart – and our true love.” In more recent years, federal white-collar crime prosecutors have used the wire fraud statute with similar zeal. On January 27, 2022, the Second Circuit Court of Appeals dealt prosecutors a significant setback in their use of the statute, overturning the wire fraud convictions of two former investment bankers found guilty of rigging the London Interbank Offered Rate (LIBOR), holding that prosecutors failed to prove the two men caused the bank to make false or misleading LIBOR submissions. The Second Circuit’s decision significantly heightens the heavy burden that prosecutors bear when bringing fraud claims for what may be deemed by the government to be unfair or even manipulative business practices. The decision holds that if an intentionally fraudulent statement could be true, then the maker of the statement could not be found to have engaged in fraudulent conduct. More broadly, the decision suggests that the Second Circuit will not find fraud where business people engage in conduct that is not clearly prohibited, even where they admittedly know what they were doing was wrong or unethical.
In 2018, a federal jury in the Southern District of New York convicted derivatives traders Matthew Connolly and Gavin Black on charges of wire fraud and conspiracy to commit wire fraud and bank fraud for their participation in a scheme to manipulate LIBOR. LIBOR was a regularly reported averaged interest rate, calculated based on submissions from lending banks around the world, reflecting the rates that the reporting banks believed they would be charged for interbank borrowing. LIBOR was a closely watched rate because it was used both in connection with interbank loans and as a benchmark for many other loans, including many consumer loans. LIBOR has been phased out in favor of alternative rates. Prosecutors had argued that Connolly and Black directed subordinates to make false LIBOR submissions to the British Bankers’ Association (BBA), the organization that publishes LIBOR rates, to manipulate the LIBOR rate and benefit their derivative trading positions. Connolly and Black appealed their convictions, arguing that the evidence presented at trial was insufficient to prove that the requested LIBOR submissions, among other things, were false or misleading.
On January 27, the Second Circuit reversed the traders’ convictions. The Second Circuit found that the evidence presented at trial was insufficient as a matter of law to show that the LIBOR-related statements that Connolly and Black submitted were false. The Second Circuit looked at the language of the BBA LIBOR Instruction, which directed each panel bank to state “the rate at which it could borrow funds.” (Emphasis added.) The Second Circuit disagreed with the district court’s denial of Connolly’s and Black’s motion for acquittal, holding that the government had no obligation to present evidence showing that the panel bank could not have borrowed funds at the rates it submitted. Further, the Second Circuit disagreed with the district court’s view that evidence that the panel bank could have borrowed funds at a submitted rate would not have rendered the submissions truthful. Specifically, the Second Circuit found that the government had failed to produce any evidence that the bank’s LIBOR submissions that were influenced by the bank’s derivatives traders were not rates at which the bank could request, receive offers, and accept loans in the bank’s typical loan amounts. Thus, the court stated that “the government [had] failed to show that any of the trader-influenced submissions were false, fraudulent, or misleading.”
Several former prosecutors have expressed consternation at the Second Circuit’s decision. While the facts of this case are quite specific, it appears that the Second Circuit was eager to reach this outcome because the court was uncomfortable with the criminalization of what were then not clearly impermissible – or illegal – business practices. The Second Circuit expressed concern with prosecutors using the federal fraud statutes as a “catch-all [] designed to punish all acts of wrongdoing or dishonorable practices.” Indeed, the Second Circuit noted that, while in 2013 the BBA LIBOR Instruction effectively prohibited the traders’ conduct, during the prior time charged in the case, the “BBA LIBOR Instruction did not prohibit LIBOR submitters’ consideration of traders’ positions.”
The Second Circuit’s reversal of Connolly’s and Black’s LIBOR convictions appears likely to have wide-ranging implications. First, it may lead to charges being dropped against other traders in connection with the LIBOR manipulation scheme. In total, six individuals in the U.S. and nine in the UK either pled guilty or were found guilty at trial in connection with their roles in LIBOR manipulation schemes. Tom Hayes, a former derivatives trader who received an 11-year sentence after being accused by the UK’s Serious Fraud Office of being the global ringleader of the traders involved in the LIBOR manipulation scheme, issued a statement on January 28 that the Second Circuit’s decision should exonerate him as well. While a U.S. court ruling has no legal effect on his conviction, Hayes hopes the Second Circuit’s decision could change the position of the UK judicial authorities.
Second, the Second Circuit’s decision may prevent prosecutors from seeking to use the wire fraud statute to charge business practices that, while unsavory, are not clearly prohibited or illegal. In fact, other business people convicted of wire fraud involving unrelated schemes have already sought to use the Second Circuit’s decision to have their convictions reversed. On Thursday, two former derivatives traders, Cedric Chanu and James Vorley, who were convicted in federal court in Chicago in 2020 in a spoofing case involving the precious metals markets, filed letters arguing that the Second Circuit’s decision exonerates them of wire fraud charges as well. Chanu and Vorley were convicted at trial of wire fraud charges for placing fake orders to move futures prices in their favor. They claim that their wire fraud convictions should be reversed because they were charged with conduct that was not clearly prohibited at the time it occurred. In Chanu and Vorley’s case, the Seventh Circuit relied on a decision from a different Libor-related case holding that statements can be rendered false merely by the intent with which they were made – a holding which Chanu and Vorley now argue the Second Circuit’s decision explicitly rejects.
Client Alert 2022-026